RBA prepared to cut rates: economists

The Reserve Bank of Australia (RBA) is set cut interest rates further as sluggish global growth threatens to push the domestic economy into recession, economists say.

Central bank policy makers expect inflation to peak by the end of 2008, but a weaker Australian dollar is tipped to delay the moderation in price pressures.
The RBA said on Monday it expects the Australian economy to grow by an annual pace of 1.5 per cent in the year to June 2009.
Just three months ago, it was forecasting yearly gross domestic product (GDP) growth of 2.25 per cent for the same period.
"Much of the softening in growth is expected to be felt in a slower pace of domestic spending," the RBA said in its quarterly statement on monetary policy.
JPMorgan chief economist Stephen Walters said the Australian economy was headed for a recession despite aggressive rate cuts from the RBA.
"The aggressive rate cuts, coupled with the government's `deployment' of the budget surplus, will provide a cushion for the economy, not prevent recession," Mr Walters said.
The RBA said a more rapid unwinding of the resources boom "than has been assumed", a slowdown in China and a fall in commodity prices from their peak would significantly weigh down Australian income.
The RBA also expected annual economic growth to slow to 1.5 per cent by the end of 2008, before climbing to 1.75 per cent in December 2009, and 2.5 per cent a year later.
Commonwealth Bank of Australia senior economist John Peters said the RBA would cut rates by 50 basis points in December - taking the cash rate to a five-year low of 4.75 per cent - as it worried about the downside risk to the domestic economy from the global credit market meltdown.
"The bank will want to get market rates down to levels quickly enough to further limit large downside risks to household spending and housing sector activity, both of which look extremely fragile at present," he said.
Debt future markets expect the cash rate, now at 5.25 per cent, to be slashed by 100 basis points in December, which would take it to 4.25 per cent. It also expects the cash rate to drop to 3.5 per cent by the middle of next year.
Interest rates were cut to 4.25 per cent in late 2001 and have not been lower since the RBA began publishing a target interest rate in 1990.
Complicating rate cut expectations are price pressures, with the RBA expecting a weaker Australian dollar, now trading under 70 US cents, to delay a moderation in inflation.
The RBA expects underlying inflation to peak at 4.5 per cent at the end of 2008 before receding in 2009.
But inflation is not expected to fall to the top of the RBA's two to three per cent target band until the end of 2010 - six months later than previously forecast.
"With the recent large depreciation of the exchange rate, import prices are expected to rise sharply and tradables inflation will gradually increase," the RBA said.
The RBA said a slowing global and domestic economy, and abating wages pressures, would help bring down inflation over the medium term, but the outlook was uncertain.

(12-Nov-2008)brought to you by aap